ASML Tops, INTC Vulnerable in Bernstein Think Piece on Chip Future

By Tiernan Ray

Bernstein Research’s Pierre Ferragu, Stacy Rasgon, Mark Li and Mark Newman this morning pen a collective think piece on the semiconductor industry, which they say is in response to “many questions about the long term prospects of the semiconductor industry.”

The authors, who bill this as the first in a series of notes,” focus on Moore’s Law, the rule that transistor density in semiconductors doubles roughly every two years or so. They offer a broad overview in the statement that “We have a good conviction there is an absolute physical hard stop on the critical dimension of a transistor at 1.5 nanometer, which at today’s pace puts a hard stop on Moore’s Law somewhere around 2030.”

Physics, the authors point out, provides some basic limit to what can be accomplished “Based on the size of an electron and the Heisenberg uncertainty principle, this approach sets the bar far ahead: a couple of thousandth of nanometre transistors and the second half of the century!”

The authors see Moore’s Law tapering off by 2030:

From a thermodynamic perspective, we find an earlier hard stop: the minimum energy required to change transistor state. The Shannon-von Neumann-Landauer expression puts an end to Moore’s Law at a 1.5nm critical dimension, or somewhere around 2030.

The authors think that although Moore’s Law will generally proceed for decades, there are three possible scenarios for the industry:

Scenario #2: The mourning of Moore’s Law squeezes margins. Manufacturers continue to deliver a steady improvement in performance, but at an increasing cost. Competition keeps the chase for incremental demand intense, at best keeping chip ASPs on their historic trajectory, i.e. not enough to keep up with increasing costs. Margins pay the bill.

Scenario #3: Power efficiency matters and saves the industry. As the decline in capital cost per transistor flattens, manufacturers slow the increase in transistor count per chip, delivering less incremental performance, but more power efficiency, as die sizes come down. This is valued by customers and keeps chip costs stable (even as wafer costs rise), and end demand intact. As a result, units and revenues stay on steady historical trends, but wafer addition slows.

The upshot of those scenarios is that “industry capex will remain elevated, with more and more going into equipment, especially lithography and process control,” the authors write.

Based on that, the authors recommend shares of lithographic tool vendor ASML NV (ASML), reiterating an Outperform ratine and a €58 price target on the ordinary shares, writing that “ASML benefits almost exclusively from lithography’s increasing share in equipment spending. The company can grow earnings by 36% p.a. between 2012 and 2015, driven by topline growth, margin expansion and share buyback.” Given that the firm’s price target is actually above today’s price on ASML shares of €59.94, I have a request in to the authors to clarify their price target.

Regarding Intel (INTC), the authors write, “Over the next 2-3 years Intel is faced with a stagnant or declining core PC market and uncertain prospects for success in fast growing tablet and smartphone markets.”

“While Intel battles to gain a significant share in the new markets, the massive capex and investment required to win, as well as structural market shift to lower-priced devices, is likely to pressure cash flows and earnings over the next several years.” The firm has an Underperform on Intel shares.

The authors reiterate Outperform ratings on share of Broadcom (BRCM) and Qualcomm (QCOM), writing that those two “and other fabless players, may benefit to an extent from slowing Moore’s Law particularly if this leads to commoditization of process technology resulting in lower wafer cost inflation and if design, rather than process technology, becomes the key differentiator; but if not, they could also face headwinds particularly if Intel places material pressure on a foundry space that cannot keep up.”

They write of contract semiconductor manufacturer Taiwan Semiconductor Manufacturing (TSM), “Leadership in 28nm and high exposure to mobile applications, the long-term challenges from Intel’s & Samsung’s competition (directly and indirectly) and cost escalation are mounting. AAPL’s business is an upside but is priced in already.”

Update: Pierre Ferragu confirms that €58 is the firm’s current price target on ASML shares. He acknowledges that the share price has exceeded that target. That would seem to imply that there will be a change in price target on the stock at some point.

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There are 9 comments

MAY 13, 2013 11:55 A.M.

Splash wrote:

They can look 20 years down the road but not 20 months down the road to see the writing on the wall that Intel is set to destroy the tablet market? First at 22nm, then at 14nm.

MAY 13, 2013 12:13 P.M.

MJD wrote:

They don't even know what Moore's law is (the definition in this article is wrong), but yet, they can predict what's going to happen 20 years from now. What non-sense.

MAY 13, 2013 12:25 P.M.

RD wrote:

That INTC view is so 2011...

MAY 13, 2013 12:50 P.M.

kidding? wrote:

Are anyone of these guys engineers or tech savy people? They sound like news reporters with little knowledge of the subject they write. They should sell insurance instead.

MAY 13, 2013 1:02 P.M.

the_floating_gate wrote:

“While Intel battles to gain a significant share in the new markets, the massive capex and investment required to win, as well as structural market shift to lower-priced devices, is likely to pressure cash flows and earnings over the next several years.” The firm has an Underperform on Intel shares."

Over and over the so called analysts deliberately ignore the fact that GF and TSMC combined capex for 2013 is on the order of $ 14,4 billions...

Putting revenue from advanced technology in perspective to capex Intel is spending about 3 times less compared to TSMC...

MAY 13, 2013 1:13 P.M.

The Dunce wrote:

These fellas need to find another line of work. This is a totally useless peice that gets everything wrong, from misunderstanding Moore's Law (its not lienar, just like Intel went from 2D to 3D), to totally missing what Intel is doing with its Silvermont architecture from Phone to Tablet to even Data Center to not even getting ASML price and price target right. I suppose Analysts have to write something to stay employed.

MAY 13, 2013 1:27 P.M.

W. Heisenberg wrote:

The saddest thing about this article is that it shows that 4 people that know nothing about science or semiconductors can still influence the INTC stock price. This is typical MBA type analysis. The future of semiconductors is not shrinking dimensions to 1.5nm. The future is new structures, new materials and new technologies that have not been commercialized yet. The long term future is not presently known, especially by these guys.

The short term future (next 4-5 years) has Intel destroying the competition by shrinking to 22nm, 14nm, and then 10nm. The foundries cannot keep up. Look for Intel to dominate servers, tablets, phones, and PC's. There is no other game in town and "fabless" companies are really going to be fabless.

MAY 13, 2013 3:47 P.M.

Barrons wants me back wrote:

Is Moore’s Law slowing down? “The answer is that it is not for the memory and processor IDMs, but definitely for the foundries,” said G. Dan Hutcheson, president of VLSI Research Inc. “The alarming thing about it is that the ability of foundries to convert their process development and tool investments into revenues has been steadily declining since 130nm. The importance of 130nm is that’s when process and design began to be recoupled....http://semimd.com/blog/2012/03/21/top-five-design-and-manufacturing-challenges-at-20nm/

MAY 14, 2013 11:54 A.M.

k wrote:

I can understand the complaint about the capital costs involved in Intc business model but when money is almost free its hardly an issue.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.